dlaw

The End of Money

Mad Hedge, I think this has very much a "toppy" feel.

If you look at the arguments for gold, there is no reason it should be going down. No reason it should go down in the foreseeable future. That is the stuff bubbles are made of - certainty.

Gold is going down. The federal government is doing all it can to inflate, but gold is going down. Down too much, the logic is destroyed and there may be panic selling. People paying $1000/oz for coins and certainty are not going to be happy at $700/oz.


On Feb 28 10:14 PM The Mad Hedge Fund Trader wrote:

> OP tf Panic buying of gold coins continues to overwhelm coins dealers
> around the world. According to the Financial Times, the US Mint sold
> 193,500 American eagles in the first seven weeks of this year, more
> than it sold in all of 2007 at prices 40% lower. Retail investors
> fleeing paper assets, like plummeting stocks and bonds, are paying
> 5% premiums over face values. The same phenomena is appearing in
> other countries were gold coins are available to the public. Does
> this have a toppy feel to it?

The End of Money

Mad Hedge, I think this has very much a "toppy" feel.

If you look at the arguments for gold, there is no reason it should be going down. No reason it should go down in the foreseeable future. That is the stuff bubbles are made of - certainty.

Gold is going down. The federal government is doing all it can to inflate, but gold is going down. Down too much, the logic is destroyed and there may be panic selling. People paying $1000/oz for coins and certainty are not going to be happy at $700/oz.


On Feb 28 10:14 PM The Mad Hedge Fund Trader wrote:

> OP tf Panic buying of gold coins continues to overwhelm coins dealers
> around the world. According to the Financial Times, the US Mint sold
> 193,500 American eagles in the first seven weeks of this year, more
> than it sold in all of 2007 at prices 40% lower. Retail investors
> fleeing paper assets, like plummeting stocks and bonds, are paying
> 5% premiums over face values. The same phenomena is appearing in
> other countries were gold coins are available to the public. Does
> this have a toppy feel to it?

The End of Money

Thanks for the comment - and all the capital letters.

Too Big to Bail: Lehman Brothers Is the Model for Fixing the Zombie Banks

The author writes:

"The definition of "systemic risk" is when markets are surprised, but these are political distinctions. Repeat after us: "there is no such thing as systemic risk," at least that can be measured scientifically."

I find this to be an absolutely remarkable statement, considering it was made by a person who is obviously so intelligent. To write such a thing, one would have to believe - in essence - that people's behavior never changes or at least that all behavior changes that are economically meaningful exist on a smooth continuum. Unable to deal with reality outside his lovely Gaussian models, he simply calls all that enormous amount of human behavior: "political" and dismisses it. It's no longer part of his world so he doesn't have to deal with it.

The very real, very well-understood *economic* fact is that when the circumstances of people's lives change - when events actually occur in their lives - their behavior changes in a quantized, discontinuoos way - no matter how much they are expecting the change. It's just a fact.

Mr. Whalen may pretend that this doesn't apply to him, but he's living in a fantasy world. So too are the bondholders of our major banks. When that fantasy world cracks, both Mr. Whalen and these bondholders will start to act very differently, very quickly and that will be a bewildering day for them.

The Tyranny of the Shareholders

Tyranny of the shareholders, eh?

So who should be in control, the workers?

I knew socialism was coming back, but I didn't expect to see it here.

;-)

The Smoking Gun of the Credit Crisis: FICO

The thing I do blame Fannie and Freddie for is not taking the AUS data and having it analyzed with sophistication. There should have been logs of multiple logins, changes in info, and data that did not fit statistical norms.

The Smoking Gun of the Credit Crisis: FICO

Gemonk, You still have to account for the fact that Fannie and Freddie have LOWER default rates than the private banks. LOWER.

Here's a quote from an industry group about the new Desktop Underwriter 7.0:

"Stop fraud
Other changes are intended to deter fraud. For example, during the boom times, brokers were known to submit a borrower's application repeatedly, fudging the debt and income numbers each time, until Desktop Underwriter granted an approval. DU 7.0 is believed to limit the number of times that the financial figures on an application can be changed; after that, the application is locked out, similar to the way an ATM will reject your card if you enter the wrong PIN multiple times"

In other words, brokers were gaming the system.

And Gemonk, it is not as if a bank is IN ANY WAY required to lend just because Desktop Underwriter says it's okay. DU does not suddenly take the money out of a bank's Federal Reserve account and do an instant closing. It's a tool - one that was badly, badly misused.


On Nov 20 05:46 PM gemonk wrote:

> I have been a mortgage underwriter for many years. FICO is a big
> issue, but even more so is AUS - the automated underwriting sysytems
> used by the GSEs. Fannie uses Desktop Underwriter (DU), Freddie
> uses Loan Prospector (LP), and others have their own in-house systems
> modelled on the GSEs.
>
> Once the AUS made a buy decision, it was virtually impossible to
> overturn, even if you knew there was something not right about the
> findings. Between 2000 and 2006, underwriting standards became slacker
> and slacker, and a higher and higher proportion of loans were approved
> by AUS.
>
> I also underwrote sub-primes for the wall street investors. They
> did not ever want to hear "this is not a good loan". they bought
> all this trash knowing it was trash - "the model accounts for fraud
> and lower credit quality" they said repeatedly. Whistling past the
> graveyard...

The Smoking Gun of the Credit Crisis: FICO

Thanks for the comment.

FICO over-predicted and, of course, FICO under-predicted default rates. And yet FICO was totally trusted as the underpinning to all the major securitization markets.

No wonder we have a problem and no wonder our paper is not trusted.

How Banks Hedge Counterparty Risk

What I want to know - if anyone out there can understand what I'm asking - is why this "meta-hedging" (if you will) does not ultimately reduce to a "martingale".

At some level, the logic seems to be that the more the bank bets the more the bank reduces risk - ad infinitum. But this seems to me to be quite wrong as the frictional costs of unwinding so many trades will be prohibitive - especially in a market without definite and high-speed clearing mechanisms.

Serendipitous Sundays for Financials

Bankrupt,

Seriously, you're making a fool of yourself. You're whining about not getting a stimulus check when you're making $87K a year?

Meanwhile the entire economy is fighting for its solvency.

What can you say to such people?

Crunching Numbers: Why I'd Buy AIG

No position in AIG or related.

Crunching Numbers: Why I'd Buy AIG

Ishortyou makes a very good point - lower valuations are obviously reasonable based on uncertainty because the uncertainty creates such an enormous volatility premium.

Even if you think you can find the floor, you're going to have to get somebody to go down there with you. Why bother?

Crunching Numbers: Why I'd Buy AIG

Or maybe AIG is still lying.

Ever think of that?

Plus I think your math is faulty.

As I see it, AIG is expecting a negative return on about $80 billion in assets of about 7.5%-8% a year for at least five years, including what we can roughly refer to as "financing". That looks like about $26 billion to me.

Moreover, an analysis without liquidity data is unreasonable. The assumption such an analysis rests on is that not only do you have deeper pockets than the market, but that someone else will have deeper pockets than you when you want to sell.

Would you buy the underlying real estate right now? No. Then why is it a good idea to buy it with leverage?

It's unsurprising to the point of un-noteworthy that models using historical performance data would say that these securities are a buy. Those are the models that created the situation in the first place.

What people can't accept is that the MBS market is now a game of musical chairs with 20-30% of the chairs taken away. Somebody will most assuredly get stuck with MBS they cannot sell and all their talk of returns will be meaningless because their principal will be gone.

When institutions holds collateral nobody wants, liquidity dries up.

Credit Crisis Review: ARMed for Failure

And not for nothing but Atavist when you call something "trivial," it's best to attach it to a comment which is not itself the most trivial statement on the entire page.

If you don't want to take the evidence from what has happened after Sub-Prime ARMs adjusted after two years and apply it to what may happen when Alt-A Lemon Loans adjust after five years, don't. But all it will mean is that you are ignoring evidence - which may suit you, I don't know.

Credit Crisis Review: ARMed for Failure

I agree with most of what the author's written, except that he makes a fool of himself by continuing this ridiculous "blame the borrowers" story.

The evidence is clear: American banks deliberately and with forethought decided to VASTLY increase the number of poorly-documented mortgages they wrote. To suggest that they were somehow taken advantage of - en masse - is absurd. Borrowers did not hypnotize American bankers. American bankers decided to securitize lots and lots of loans with "broken odometers".

These were not "liar loans," these were "Lemon Loans" - bad product deliberately brought to market with bad information.

Messrs. Akerlof, Spence, and Stiglitz got a Nobel prize in economics for telling us what happens when you fill a market with lemons - and it's not good.